Being In The Minority Can Cost You And Your Company

The racial wage gap in the United States — the gap in salary between whites and blacks with similar levels of education and experience — is shaped by geography, according to new social science research.

The larger the city, the larger the racial wage gap, according to researchers Elizabeth Ananat, Shihe Fu and Stephen L. Ross, whose findings were recently published by the National Bureau of Economic Research.

"The average racial gap in metropolitan areas of around 1 million people — and you can think of a place like Tulsa, Okla. — is about 20 percent smaller than the gap in the nation's largest metro areas of Chicago, L.A. and New York," Ananat says.

Ananat's research suggests that the racial gap is not directly the result of prejudice or, at least, prejudice conventionally defined. Rather, it has to do with patterns of social interactions that are shaped by race — and a phenomenon that economists call spillovers.

Economists have long noted that multiple companies in an industry often congregate in an area — think of movie companies in Hollywood or investment bankers on Wall Street — and observed that these firms become more profitable. Indeed, this may be one reason why an up-and-coming tech company would want to locate in Silicon Valley, rather than in Tennessee, where costs are far cheaper.

But why do companies that congregate become more profitable? It has to do, Ananat says, with the fact that when a number of companies involved in similar work are concentrated in one area, they effectively create an ecosystem where ideas and refinements can spread easily from one company to the next, and increase productivity overall.

"It's stuff in the ether — you know, these tips that get communicated," Ananat says. "For any given job, it's going to be specific to that job. That's why they are so hard to identify and so valuable. We say, 'Oh, you're not doing that quite right. Do it just this way instead.' "

What does all of this have to do with the racial wage gap? Much of this valuable information that gets transmitted and shared in the ecosystem happens in informal or social settings — over lunch, or a beer after work, or even at church on Sunday. Those social settings tend to be segregated, with whites tending to spend time with whites and blacks with blacks. (The next time you are in an office cafeteria, notice who sits next to whom at lunch.) In a world where ethnic groups cluster together, those in the minority are less likely to share and benefit from spillover effects in the ecosystem and are therefore less likely to learn early on about important company developments or technological innovations.

"People of the same race are much more likely to have conversations where they share ideas," she says. "The fact is you just talk more about everything with people who you feel more comfortable with than with people you feel less comfortable with. And we know that one of the big predictors of who you feel comfortable with is whether you are of the same ethnicity."

Ananat explains the findings with a hypothetical example: "Say there are 1,000 black engineers in Silicon Valley, compared to 20 in Topeka, and there are 10,000 total engineers in Silicon Valley, compared to 500 in Topeka. Then blacks make up 10 percent of engineers in Silicon Valley, compared to 4 percent in Topeka."

"A black engineer in Silicon Valley has 980 more black engineers to get spillovers from than does a black engineer in Topeka," she writes in an email. "Meanwhile, a white engineer in Silicon Valley has 8,500 more white engineers to benefit from than a white engineer in Topeka. Thus, while both white and black engineers' wages will be higher in Silicon Valley than in Topeka, the white engineer's wages will increase more than the black engineer's do — in effect, the white engineer is living in a much bigger city (of engineers) than the black engineer is, if only people within one's own race matter for urban spillovers."

Obviously, in the real world, social encounters are not totally segregated and other factors — including out-and-out prejudice — could play a role. But what seems to be happening, Ananat says, is that minority groups often miss out on the valuable tips and mentoring that make these ecosystems so productive and profitable. The same thing happens with other ethnic minorities, and even with whites — when they are in a minority.

Companies that want to take full advantage of spillover effects would do well to find ways to encourage employees to share information, set up mentoring programs and generally encourage employees to connect informally and socially, Ananat says.

Social scientists, she adds, have long talked about the value of "code-switchers" — people adept at talking across differences and who relate well to those from other groups. Companies with more code-switchers are likely to spread the wealth of spillover effects more equitably.

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Transcript

DAVID GREENE, HOST:

And let's focus some more on wages. There is a persistent wage gap in many parts of the United States that's based on race. In many places, blacks with the same educational background and experience as whites are earning less than whites, and new social science research suggests that the size of that wage gap might depend on where you live, interesting research that NPR social science correspondent Shankar Vedantam has come in to talk about. Shankar, thanks for coming back.

VEDANTAM: You know, geography does affect the racial wage gap, David, but it's not in the way that I would've predicted. When I think about cities versus rural areas, urban areas tend to be more diverse and African-Americans often have more power in big cities. And I would have expected to see a smaller racial wage gap in big cities.

GREENE: In these big, diverse places.

VEDANTAM: Exactly. I spoke with Elizabeth Ananat. She's at Duke University. And along with her coauthors Steve Ross and Shihe Fu, she's found it's exactly the opposite: the bigger the city, the larger the racial wage gap.

ELIZABETH ANANAT: The average racial gap in metropolitan areas of around one million people - and you can think of a place like Tulsa, Oklahoma - is about 20 percent smaller than the gap in the nation's largest metro areas of Chicago, L.A. and New York.

GREENE: Wow. Big cities like Chicago, L.A. and New York, the racial wage gap 20 percent more. That's stunning. It can be a big deal for people over the course of a career.

VEDANTAM: It is a big deal, and I asked Ananat what explains it, and she told me it's something to do what economists call spillover effect. And let me back up a second, David, and just explain that. Social scientists have long been interested on why firms congregate in geographic areas. So why are all the movie companies in Hollywood? Why are the banks in Wall Street? If you're a tech company, why aren't you in Tennessee rather than Silicon Valley? It's going to be much cheaper.

And it turns out that when companies congregate in an area, they become much more profitable. They become more profitable because when you have a lot of companies in the same area doing things, they, in effect, form one large, uber-company where ideas and expertise are flowing across the companies in very profound ways. I asked Ananat what kind of information this involves. Here's what she told me.

ANANAT: It's stuff in the ether, you know, these tips that get communicated for any job. It's going to be specific to that job. That's actually why they're so hard to identify and so valuable. We say, oh, you're not doing that quite right. Do it just this way instead.

GREENE: OK, Shankar, I think I understand this, these companies concentrating and sharing information. But what does this have to do with the racial wage gap that we're seeing?

VEDANTAM: Well, it turns out, David, that a lot of this information that gets transmitted doesn't get transmitted in professional settings, but it gets transmitted in social settings. So you meet people at parties. You meet people at church. You meet people for a beer after work. And it turns out these social areas are deeply segregated in America. You know, Martin Luther King once said the most segregated hour in the country is Sunday morning, when people are at church.

GREENE: Yeah. At church.

VEDANTAM: So, if you're a member of a minority group, you're far less likely to be part of these social networks that meet after work. And in big cities, where there's more sharing of this kind of information, blacks suffer disproportionately, which is why the wage gap expands.

GREENE: Interesting stuff. Let me make sure I understand this. In these big cities, you more often have this spillover. You have different companies sharing information. Turns out, it's in social settings. And you have this big majority of people - and the majority is often white - who are making more and more money, becoming more and more successful by having all these conversations. And the gap grows.

VEDANTAM: Exactly. What's important to remember, David, that this is not happening necessarily at an intentional level. So it's not that blacks have been deliberately left out of social settings. And, in fact, there's research that suggests the same thing with other minority groups, with Asians and with Latinos. It even happens with whites. So when whites are in the minority and they move into a predominantly black industry, whites suffer from the losing out in the same spillover effect.

GREENE: So if companies in these big cities where there's spillover want to make everyone who works for them as successful as possible, should they be encouraging employees to cross the racial barrier and make sure they're in social settings with people of all backgrounds?

VEDANTAM: That's exactly what Ananat told me, that both in schools, as well as in professional settings, we need to teach people to work much better and communicate much better across differences. Social scientists often talk about people who are code-switchers. These are people who are very adept at talking across differences and making people from different groups feel comfortable with them. It turns out the more code-switchers you have in your company, the more profitable you're probably going to be.

GREENE: Interesting you bring up that term. Code Switch is the name of our new project at NPR covering race, ethnicity and culture. Shankar, thanks so much for coming in, as always.

VEDANTAM: Thanks, David.

GREENE: Shankar Vedantam. He regularly joins us to talk about social science research. You can find him on Twitter @HiddenBrain, and you can find this program @NPRGreene and @MorningEdition.